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  • Keller, Godfrey

    ()
    (Department of Economics, University of Oxford)

  • Rady, Sven

    ()
    (Department of Economics, University of Bonn)

Abstract

We study a continuous-time game of strategic experimentation in which the players try to assess the failure rate of some new equipment or technology. Breakdowns occur at the jump times of a Poisson process whose unknown intensity is either high or low. In marked contrast to existing models, we find that the cooperative value function does not exhibit smooth pasting at the efficient cut-off belief. This finding extends to the boundaries between continuation and stopping regions in Markov perfect equilibria. We characterize the unique symmetric equilibrium, construct a class of asymmetric equilibria, and elucidate the impact of bad versus good Poisson news on equilibrium outcomes.

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Article provided by Econometric Society in its journal Theoretical Economics.

Volume (Year): (Forthcoming)
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Handle: RePEc:the:publsh:1670

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Related research

Keywords: Strategic experimentation; two-armed bandit; Bayesian learning; Poisson process; piecewise deterministic process; Markov perfect equilibrium; differential-difference equation; smooth pasting; continuous pasting;

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  1. Godfrey Keller & Sven Rady, 1997. "Optimal Experimentation in a Changing Environment," STICERD - Theoretical Economics Paper Series /1997/333, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
  2. Dumas, Bernard, 1991. "Super contact and related optimality conditions," Journal of Economic Dynamics and Control, Elsevier, vol. 15(4), pages 675-685, October.
  3. Sven Rady & Godfrey Keller, 2007. "Strategic Experimentation with Poisson Bandits," 2007 Meeting Papers 332, Society for Economic Dynamics.
  4. Dirk Bergemann & Ulrich Hege, 2001. "The Financing of Innovation: Learning and Stopping," Cowles Foundation Discussion Papers 1292, Cowles Foundation for Research in Economics, Yale University.
  5. Moscarini, Giuseppe & Squintani, Francesco, 2010. "Competitive experimentation with private information: The survivor's curse," Journal of Economic Theory, Elsevier, vol. 145(2), pages 639-660, March.
  6. Daron Acemoglu & Kostas Bimpikis & Asuman Ozdaglar, 2011. "Experimentation, Patents, and Innovation," American Economic Journal: Microeconomics, American Economic Association, vol. 3(1), pages 37-77, February.
  7. Decamps, Jean-Paul & Mariotti, Thomas, 2004. "Investment timing and learning externalities," Journal of Economic Theory, Elsevier, vol. 118(1), pages 80-102, September.
  8. Bruno Biais & Thomas Mariotti & Jean-Charles Rochet & StÈphane Villeneuve, 2010. "Large Risks, Limited Liability, and Dynamic Moral Hazard," Econometrica, Econometric Society, vol. 78(1), pages 73-118, 01.
  9. Bruno Strulovici, 2008. "Learning while voting: determinants of collective experimentation," Economics Papers 2008-W08, Economics Group, Nuffield College, University of Oxford.
  10. Alessandro Bonatti, 2011. "Menu Pricing and Learning," American Economic Journal: Microeconomics, American Economic Association, vol. 3(3), pages 124-63, August.
  11. Keller, Godfrey & Rady, Sven, 2003. " Price Dispersion and Learning in a Dynamic Differentiated-Goods Duopoly," RAND Journal of Economics, The RAND Corporation, vol. 34(1), pages 138-65, Spring.
  12. Bergemann, Dirk & Hege, Ulrich, 1997. "Venture Capital Financing, Moral Hazard and Learning," CEPR Discussion Papers 1738, C.E.P.R. Discussion Papers.
  13. Dinah Rosenberg & Eilon Solan & Nicolas Vieille, 2004. "Social Learning in One-Arm Bandit Problems," Discussion Papers 1396, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  14. Bruno Strulovici & Martin Szydlowski, 2012. "On the Smoothness of Value Functions," Discussion Papers 1542, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  15. Abreu, Dilip & Milgrom, Paul & Pearce, David, 1991. "Information and Timing in Repeated Partnerships," Econometrica, Econometric Society, vol. 59(6), pages 1713-33, November.
  16. Moritz Meyer-ter-Vehn & Simon Board, 2009. "Reputation for Quality," 2009 Meeting Papers 160, Society for Economic Dynamics.
  17. Francesco Squintani & Hugo Hopenhayn, 2005. "Preemption Games with Private Information," 2005 Meeting Papers 80, Society for Economic Dynamics.
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